Digging In: As Lowe's Struggles And Dick's Sprints, Everyone's Waiting For Movement In Washington

(Tuesday market open) Despite lack of progress on the debt ceiling, Wall Street continues to behave as if a deal is likely to happen. Major indexes dropped slightly early Tuesday, but volatility remains muted and the dollar keeps climbing.

There was no “get-out-of-jail free” card from the Treasury Department Monday, as Treasury Secretary Janet Yellen reconfirmed June 1 is likely the date when extraordinary measures to avoid default will run out. Some analysts had suggested there cou-ld be an extension, but Yellen maintained that the closer the government gets to that date without a deal, the more potential damage.

Last night’s meeting between Speaker Kevin McCarthy and President Joe Biden didn’t appear to achieve any breakthroughs, but the discussion was “productive” and the tone was “positive,” according to media reports. Any agreement still needs congressional approval.

Things were a bit slow on Wall Street yesterday as investors watched the debt ceiling clock tick away, though the Nasdaq 100® (NDX) set a new nine-month high thanks in part to solid performance in the communication services sector. There’s a sense that the market may not have much direction until Washington gets its house in order.

The S&P 500® index (SPX) is up about 1% over the last month and traded in a very tight range yesterday. Volume was low again Monday, another feature we’ve seen since the debt ceiling came into focus and one that suggests investor conviction remains low.

Morning rush

• The 10-year Treasury note yield (TNX) keeps climbing, up 2 basis points to 3.74%.
• The U.S. Dollar Index ($DXY) rose slightly to 103.53, remaining near two-month highs.
• The Cboe Volatility Index® (VIX) futures inched up to 17.66.
• WTI Crude Oil (/CL) rose to $72.76 per barrel.

VIX stayed near the lower end of its 52-week range near 17 as the week began, “which essentially conveys that VIX traders believe that debt talks will find resolution,” says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

Yields and the dollar keep climbing, likely due to hawkish talk from Federal Reserve officials early this week.

Just in

Shares of Dick’s Sporting Goods (DKS) and Lowe’s (LOW) went their separate ways after the two retailers reported earnings this morning. DKS rose after the company beat analysts’ revenue and earnings per share (EPS) estimates and confirmed guidance, driven by 3.4% same-store sales growth.

Lowe’s dipped despite the quarterly results surpassing Wall Street’s expectations. The home improvement company’s guidance was the fly in the ointment as it projected EPS below Wall Street’s thinking and reduced its revenue outlook. This comes after LOW competitor Home Depot (HD) cut its forecast last week. In its press release, LOW cited “softer than expected consumer demand for discretionary purchases,” a familiar theme to anyone following the retail sector lately.

European markets came under pressure Tuesday after lackluster May manufacturing data out of Germany and the U.K. This comes even as inflation remains elevated across the continent, forcing recent rate hikes by the European Central Bank (ECB).

Stocks in the Spotlight

Earnings parade: This week’s jam-packed earnings calendar rolls on tomorrow with Nvidia (NVDA) and continues Thursday with Costco (COST) and Best Buy (BBY).

Chip chat: NVDA stock has rallied ahead of the chipmaker’s earnings report, even though it reported a 21% revenue drop in its fiscal Q4 and analysts expect a similar year-over-year revenue decline and a sharp earnings decline in fiscal Q1. Excitement over Artificial Intelligence (AI) might account for the stock’s nearly 13% rise since the start of April. The company’s data center business could see growth as cloud vendors scale out AI infrastructure, Oppenheimer said recently in an analyst note quoted by Barron’s.

Gadget update: BBY might get clipped by consumer trends. It’s likely people are still getting a lot of use out of those computers and gadgets they bought during the pandemic. The company announced in April that it plans to eliminate hundreds of workers who sell more complex electronics like computers and smartphones and is in the process of “evolving” its stores and “experiences” to better reflect “changes in shopping behavior.”

Eye on the Fed

Chances of a Fed pause at the June meeting stand at 76% as of this morning, according to the CME FedWatch tool.

Monday felt like Fed speakers were out to erase memories of Fed Chairman Jerome Powell’s slightly dovish Friday remarks. St. Louis Fed President James Bullard talked about chances of two more rate hikes and Minneapolis Fed President Neel Kashkari told CNBC that a pause in June wouldn’t necessarily mean the end of the Fed’s tightening cycle.

It’s perilous to ignore the drumbeat of hawkish Fed talk, and investors might want to take heed. Chances of a June pause may be relatively strong, but the rate cuts anticipated later this year by the futures market seem unlikely to happen unless the economy truly heads south. Investors slowly appear to be reaching that conclusion. The FedWatch Tool, which once had priced in a nearly 100% chance of at least one rate cut by year’s end, now only predicts 80% probability of a cut. Chances of a cut by September have fallen below 20%.

What to Watch

Credit stands tall: Two months after the worst banking turmoil since 2008, U.S. credit markets still look resilient despite talk of a possible “credit crunch.” Last week saw investment grade-rated companies issue $61 billion in new debt, the most for any week so far this year and the 12th-highest weekly level in history, according to Informa Global Markets (IGM). Another $20 billion to $30 billion in new issuance is expected this week. Credit spreads (the premium of corporate debt yields to Treasury yields) have remained in a narrow range. That said, recent sharp gains in Treasury note yields could begin to hurt if they persist, perhaps dampening future demand on the corporate side.

PCE ahead: Stay on your toes Friday for critical April inflation data in the form of Personal Consumption Expenditures (PCE) prices. This is the inflation metric watched most closely by the Fed. Analysts expect headline and core PCE prices to rise 0.3% in April, compared with 0.1% and 0.3%, respectively, in March, according to Briefing.com. The core data strips away volatile energy and food prices. If core is 0.3%, it’s likely to keep the Fed concerned about prices. The annual level was 4.6% in March and hasn’t departed from a narrow range between 4.6% and 4.8% over the November-through-March period—meaning no real signs of improvement toward the Fed’s goal of 2%.

Springtime for Europe: The data aren’t all U.S.-centric this week. Several European Purchasing Managers Index (PMI) reports are on the way. European stocks have outpaced U.S. stocks by just a smidgen so far this year (10% to 9%) but leveled off quite dramatically over the last month as the ECB continues cranking interest rates higher to fight persistent inflation across the continent.

Debt piles up: Even if the U.S. reaches a debt ceiling agreement, debt both at home and abroad remains at troublesome levels that could end up impeding future growth, says Schwab Chief Global Investment Strategist Jeffrey Kleintop in a new report.

CHART OF THE DAY: SPRING SAG: Commodities, including copper futures (/HG—candlesticks) and the Bloomberg Commodity Index (/AW—purple line), began the year on an up note but haven’t found much traction since. Copper is at a 5-month low. This could start raising questions about the resilience of the global economy. Data sources: CME Group, Bloomberg. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

All clear unclear: Even if the debt ceiling debate gets resolved in time, a major Wall Street rally can’t be dialed in. The villain here is valuations. Last week’s gains took the major indexes to their highest levels since last August and fueled valuation growth as well. High valuations ultimately need solid earnings to support them. Unfortunately, the forward earnings picture likely faces a black diamond downhill slope before potentially climbing back on the chairlift, which could be a real barrier to the market’s attempts to push through current long-term resistance levels. The S&P 500® index now trades above 18 on a forward price-earnings (P/E) basis (slightly above the historic average), and analysts expect a 6.7% drop in year-over-year EPS during Q2, according to FactSet. That improves to 0.7% and 8.1% in Q3 and Q4, respectively, but ends up delivering just 1% EPS growth for 2023 versus 2022. High valuations ahead of expected falling earnings isn’t a solid foundation for a rally.

2024 musings: With the year nearly halfway through, investors might soon want to consider factoring in 2024 earnings estimates as they mull where markets might head over the next year. The first half of next year could potentially see S&P 500 earnings benefit from relatively easy comparisons, though interest rates, the dollar, and economic growth could represent headwinds or tailwinds for various companies. A lot also depends on whether net profit margins can turn around after several quarters of decline. The next few monthly Producer Price Index (PPI) inflation reports could potentially provide investors clues into whether the wholesale market continues to put companies between a rock and a hard place, having to decide whether to eat losses or raise prices and perhaps drive away customers.

Out of style: Last week’s retail earnings generally disappointed—either the results themselves or the outlook. From a high-level view, discount stores are performing better thanks mainly to a cautious consumer who’s spending less on so-called “discretionary” items. This could be good news for Dollar Tree (DLTR), which is expected to report Thursday. It’s not so good for companies like Foot Locker (FL) which saw shares fall more than 20% last Friday after sour results and a tepid outlook. The problem is that athletic gear and sneakers are things people might put off buying if they’re feeling the impact of inflation and higher interest rates. Also, FL has a customer base that’s traditionally tilted toward lower income people who tend to feel the most pain from inflation. That’s probably not the case for a more upscale retailer like Macy’s (M), expected to report the week of Memorial Day.

Calendar

May 24: Expected earnings from Nvidia (NVDA).

May 25: Q1 GDP second estimate, April Pending Home Sales, and expected earnings from Dollar Tree (DLTR), Costco (COST), and Best Buy (BBY).

May 26: April Personal Consumption Expenditures (PCE) prices, April Personal Income and Personal Spending, April Durable Orders, Final May University of Michigan Consumer Sentiment.

May 29: Memorial Day – markets closed.

May 30: May Consumer Confidence.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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